Leasing — IFRS 16

IFRS 16, which entered into force on 1 January 2019, aims to increase transparency in financial reporting by requiring that lease agreements, with certain exceptions, be recognized as an asset and a liability on the balance sheet. Previously, many lease agreements, especially operating leases, could be kept off the balance sheet, which gave an incomplete picture of the company's financial position and debt-to-equity ratio.

The rules mean that companies must carry out a complex assessment of whether a contract contains a right to use an asset for a period in exchange for payment, which affects financial ratios such as the equity ratio and the debt-to-equity ratio.

For AK1A Research Lab, this means that models for the valuation and analysis of companies must be updated in order to correctly reflect the underlying financial risk and capital structure. An analysis that ignores these balance sheet effects risks giving a misleading picture of a company's economic health and valuation.

This is particularly important for being able to compare companies with different leasing strategies on one and the same level.

The process begins by identifying all contracts that constitute a lease under the standard. This includes not only formal lease agreements but also other contracts granting rights to use assets, such as certain agreements on rental rights or sublicensing. The next step is to classify the lease as a finance lease (if it in practice transfers almost all risks and benefits) or an operating lease.

However, IFRS 16 has eliminated this classification for lessees; all rental agreements (except the exemption for short-term and low-value leases) are treated the same way.

After identification, the company must determine the length of the lease term and discount the future lease payments in order to calculate the initial valuation of both the lease asset (Right-of-Use Asset, ROU) and the lease liability. This valuation then affects the depreciation of the asset and the interest expense on the liability over the contract period.

It is crucial to document assumptions, such as the discount rate and the length of the lease term, since these have a direct impact on the balance sheet and the income statement.